Is Performance Technologies S.A.'s (ATH:PERF) Recent Stock Performance Tethered To Its Strong Fundamentals?

Performance Technologies (ATH:PERF) has had a great run on the share market with its stock up by a significant 31% over the last month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Performance Technologies' ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Performance Technologies

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Performance Technologies is:

20% = €4.7m ÷ €24m (Based on the trailing twelve months to December 2023).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.20 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Performance Technologies' Earnings Growth And 20% ROE

To begin with, Performance Technologies seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 15%. Probably as a result of this, Performance Technologies was able to see an impressive net income growth of 22% over the last five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Performance Technologies' growth is quite high when compared to the industry average growth of 15% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for PERF? You can find out in our latest intrinsic value infographic research report

Is Performance Technologies Efficiently Re-investing Its Profits?

Performance Technologies' ' three-year median payout ratio is on the lower side at 12% implying that it is retaining a higher percentage (88%) of its profits. So it looks like Performance Technologies is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, Performance Technologies has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

Overall, we are quite pleased with Performance Technologies' performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. You can see the 1 risk we have identified for Performance Technologies by visiting our risks dashboard for free on our platform here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.